What is a Personal Service Corporation

Tax advantages are one of the primary reasons individuals incorporate their business organization, just if the CRA classifies your business concern as a "Personal Service Corporation" it may set yous back. In a previous article , we outlined the benefits and drawbacks of incorporating your small business. Incorporating your business not only saves money during tax season but also protects your personal assets and reduces your liability. Nevertheless, as a ane-person company, the ramifications of incorporating are huge.

A Personal Service Corporation tax proclamation volition cause yous to lose your tax deductions and yous may even be required to pay up for tax deductions from previous years.

What is a Personal Service Corporation?

Corporations are treated as a separate entity from the business owner. If y'all declare your business equally a Personal Services Corporation, you will non be considered self-employed, only rather an incorporated employee (an individual working on behalf of a corporation). The relationship between the company and the incorporated employee needs to be distinctly an independent contractor in order to not apply.

Personal Service Corporations provide personal services to individuals and groups. An incorporated concern that provides services that an employee of the visitor would usually perform is considered a Personal Service Corporation and the private, an "incorporated employee".

How does a Personal Service Corporation Work?

With boundaries and irresolute work practices, freelancers and independent contractors run the risk of resembling an employer-employee. If your business organization is incorporated and you lot operate as an contained contractor, the business yous are hired past doesn't need to pay employee revenue enhancement.

Am I an employee or an independent contractor?

To make up one's mind if y'all are an employee or an independent contract, the Canada Acquirement Agency considers the following factors:

  • Practice y'all command your hours and schedule?
  • Do y'all command the work?
  • Do yous own the tools used for your job?
  • Are you lot responsible for any financial risk in your contract?

For small businesses with no big plans to expand, a sole proprietorship may be a better option, despite fewer tax benefits and protection.

How to Avoid Being Declared a Personal Service Corporation

In adept faith, nosotros cannot provide a pros and cons list because at that place is significantly more disadvantages to being classified as a Personal Service Corporation by the CRA. Fewer deductions, more revenue enhancement, and tax penalties are the primary disadvantages. Hither is how to avert existence classified as a Personal Service Corporation:

  1. Hire more than five total-time employees throughout the twelvemonth. This option isn't always the most feasible, especially for pocket-sized business owners.
  2. Provide services to associate corporation

Do I still receive deductions?

Unlike other corporations, personal service businesses do not receive pocket-size business concern deductions and generate rate reductions. They are fully taxed federally and provincially on all their taxable income. In addition, there is another five% tax on their taxable income.

A personal service business concern cannot write off equally many expenses either. Some items they cannot deduct include:

  • Travel expenses
  • Phone bills
  • Office supplies
  • Meals

They can simply deduct:

  • A salary/wage/benefit that is paid to the incorporated employee(due south)
  • Legal expenses for collecting amounts owing

How are Personal Service Corporations Taxed?

A personal service corporation pays revenue enhancement at the total corporate. They are taxed by multiplying taxable income past 21%. In British Columbia , the total taxation charge per unit for a corporate business is over 30%. For loftier-earning professionals with a C-Corp or Personal Service Corporation, the structure allows employees to go out some of their income in the corporation to be taxed at a lower corporate rate. Even though a Personal Service Corporation has less relief with deductions due to the classification, employees and business owners can notwithstanding brand use of taxation-free fringe benefits such as health and dental insurance, medical expenses reimbursement, and education assistance.

Need help with taxes?

If your business organization is a Personal Service Corporation, y'all nonetheless need to manage your finances and pay taxes. To ensure, you practise non get in problem with the Canada Revenue Agency (CRA), information technology is important that you accept extra care to track where your money goes.

At Soleimani Accounting, we specialize in providing professional financial services for small businesses and corporations. From bookkeeping and accounting to taxation, we are here to aid your business thrive through sound financial advice and assist. Make it bear on to book a free thirty-infinitesimal consultation.